Industrial Engineering

How Are We Doing?

the_kpi_lifecycle2

Picture source: tkhalid.wordpress.com

BY PAUL ENGLE

INDUSTRIAL ENGINEER – VOLUME 45 NUMBER 3

This ageless story highlights the difficulties management faces when attempting to make and important decisions based solely on financial statement. Financial statement historically represent the most important metrics for any business, but they are not enough to determine business operations. First, the reports can lack the granularity required to identify problems within the organization. Income statements and balance sheets may mask a problem until it is so large that it affects the entire enterprise. Second, financial statements are by their nature historical documents. They tell us about the past rather than providing management with real-time information regarding the state of the company.

Key performance indicators can address management’s dilemma. KPIs represent activities that have the greatestimpact on an organization’s success and are reported daily to management. Many companies track sales revenue in real time and adjust pricing, inventory, product mix and other variables based on this information. Other KPIs can include cash, receivables, inventory levels, advertising and marketing activities, expense ratios, workforce productivity and improvement activities. KPIs should be chosen carefully to provide management with the business intelligence it needs for operations. Tying KPIs to these investment activities provides management with important feedback on the effectiveness of this strategy without waiting for and analyzing complex financial statements.

Selecting KPIs typically relates to the strategic business plan, which defines areas for investment of capital, expenses, human resources and other assets. Most companies rely on KPIs as an important management tool to help executives assess the state of the enterprise and make timely decisions.